Risky M&A–Delighting Shareholders to the Detriment of Customers

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B2B International

March 14, 2012

In this week’s Business Surgery, Julia Cupman discusses the risk to customer satisfaction through badly managed M&A

The repercussions of the merger of United and Continental airlines are continually impacting on the B2B International team. Many of us here at B2B travel with Continental (sorry, “United Airlines”) domestically as well as across the Atlantic between our North American and European offices, and it is shocking how badly the company is managing the merger. Over the past six months alone, we have experienced canceled and delayed flights with inadequate notifications, call wait times exceeding one hour, uncomfortable flying conditions such as freezing cabin temperatures, and soaring prices.

Continental and United were among many companies in the post-recession period–including Microsoft and Skype, Sanofi-Aventis and Genzyme, and Intel and McAfee–that turned to M&A for growth, through investing the significant cash reserves they had built during the financial crisis. Both airline CEOs promised “improved profitability and sustainable long-term value for shareholders”, and the $3.17billion merger of the two companies propelled the new United to the top of the industry, with 21% of domestic capacity. The company has less competition and increased monopolistic power, and can therefore charge higher prices–music to the ears of shareholders.

However, as per our experience, delivering value to shareholders is not synonymous with an improved customer value proposition post-merger/acquisition. An article in McKinsey Quarterly points out that the more successful mergers and acquisitions create value, and do so through at least one of the following five archetypes:

• Improving the performance of the target company;

• Removing excess capacity from an industry;

• Creating market access for products;

• Acquiring skills or technologies more quickly or at lower cost than they could be built in-house;

• Picking winners early and helping them develop their businesses.

One could assume that United and Continental’s goal fell within the first of these archetypes, but over a year after the merger, the unified airline is failing to satisfy its customers on a range of critical success factors. Although the company has pleased shareholders in growing market share and achieving economies of scale, United runs the risk of decreasing customer satisfaction levels to the point that more and more passengers will start switching to other airlines.

Customers are often neglected while companies pursue M&A as the focus is inevitably on the huge changes occurring internally, from restructuring through to changes in IT infrastructures and brand rationalization. Not surprisingly, the internal chaos results in confusion in the marketplace and disgruntled customers. Indeed a BusinessWeek study reported a 50% reduction in satisfied customers, even two years after a merger. In the case of Continental, decreasing customer satisfaction is reflected in the customer satisfaction scores published by the American Customer Satisfaction Index. The company has never been at the level of South West Airlines, but since the merger with United, Continental’s customer satisfaction scores have plummeted.

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As the North American economy stabilizes, more companies are considering M&A to grow. It is critical that these companies incorporate initiatives driving customer satisfaction and loyalty into their change management programs throughout the M&A process. Successful M&A is not just about investing in companies; it’s also about investing in customers.